Sunday, July 31, 2005

China has rushed a first batch of vaccine to the southwestern province of Sichuan, where a pig-borne disease has killed at least 34 people.

The Xinhua news agency reports that enough vaccine to treat Streptococcus suis bacteria in 350,000 pigs has been flown to the province. Another 10 million doses are being manufactured and will be sent to affected areas.

Health authorities have identified 174 human cases - either confirmed or suspected - of the illness as of Saturday.

Most victims had handled either infected pigs or pork. China says no human-to-human transmission of the ailment has been seen.

Two cases have been reported in Hong Kong, adjacent to Guangdong, but they are believed to be unrelated to the Sichuan outbreak.

Saturday, July 30, 2005

China's ministry of health says 34 people have died from a disease, caused by streptococcus suis bacteria, carried by pigs.

On Saturday, the ministry released new figures saying 174 cases of the illness, commonly called swine flu, have been identified. That is an increase of 22 over Friday's figure. There were three additional deaths in the same period.

China's official news agency Xinhua reports that one of the new cases came from Guangdong province near Hong Kong. That would be the first case outside Sichuan province, where the outbreak began. Xinhua says a slaughterhouse worker in Guangdong was treated and released from the hospital.

Those infected have handled infected pigs or infected pork. China says there has been no human-to-human transmission of the disease.

A basketball game between China and visiting Puerto Rico deteriorated into a brawl Friday night in an incident Chinese state media termed a bad example by the future Olympic hosts.

The fighting erupted at Beijing Capital Gymnasium when two Chinese players charged off the bench after seeing teammate Yi Jianlian fouled hard by Puerto Rican center Manuel Narvaez. The bad feelings spilled into the stands, where 3,000 home fans hurled insults and missiles.

Officials ended the game as the visitors fled to the locker room, one shielding his head with a plastic chair.

China's basketball association deplored the violence as setting a poor example three years before Beijing hosts the summer Olympics. The association says it will adopt measures to prevent such violence in the future.

Friday, July 29, 2005

The World Health Organization (WHO) says it's too early for China to say if a pig-borne disease that killed at least 30 people is under control.

A WHO official says China did a good job of responding to the disease, but more investigating and testing needs to be done.

Chinese Health Minister Gao Qiang has called on local officials and health workers to step up inspection work and prevent the transport of sick pigs.

Gao says the government has "preliminary control" of the bacterial disease that originates in pigs and has infected dozens of people.

But Bob Dietz, a spokesman for the World Health Organization, disagrees. Although the outbreak seems to be localized in one province, the disease has spread to more towns in the area, according to Dietz.

Says Diestz: "As we see the numbers continue to rise, both in terms of the apparent number of cases and the apparent numbers or deaths, that when you're in a situation like that, to say that its under control does seem premature."

China's Ministry of Health says the death toll reached 31 people by Thursday afternoon, four more than the day before. There were also 21 new infections, bringing the total confirmed or suspected infections to more than 150.

The disease, which was discovered in June in China's southwestern Sichuan Province, infected farmers and pig-slaughterers who came in contact with infected pigs. So far, there have been no cases of it spreading from human to human.

The WHO is not disputing preliminary laboratory tests in China indicating the disease is caused by a known pig-borne bacteria; and Dietz says the Chinese government is doing a good job responding to the outbreak and sharing information with the World Health Organization.

China's state media say roadside checkpoints have been set up to keep sick pigs or infected meat from spreading around the country.

Thousands of health workers have been sent to farming households around the city of Ziyang, where most of the infections were found, to inspect and register every pig in the region.

Concerned by the prospect of putting American technology and resources in the hands of state-owned, Beijing-based companies, the US Senate last week passed a bill aimed at slowing down any foreign takeover of American firms. The move comes on the heels of a takeover earlier this year of IBM’s personal computer division by China’s largest computer maker, Lenovo, and a failed bid by a Chinese consortium to acquire American appliance manufacturer Maytag.

Analysts wary of China’s intentions say the Unocal bid should be reviewed for security considerations. Peter Morici, who teaches International Business at the University of Maryland, warns that China’s bid for Unocal may be driven by other motives.

"This is not Maytag, this is not ThinkPad," says Morici. "This is China seeking strategic American expertise at a time when it’s made threatening noises toward Taiwan. It’s building a blue water navy, and seems intent on challenging the United States in international institutions, which were put in place to defend democracy."

The most recent Pentagon study goes further, asserting that China is modernizing its military with the long-term goal of projecting power beyond Taiwan, potentially posing a threat to other, modern forces in the region.

Most economists, however, regard the recent spate of Chinese bids for US companies as purely commercial transactions. They point out that China, the world’s most populous country, also has the world’s fastest growing economy, with an annual growth rate of nine percent in the third quarter of 2004.

According to UN estimates, China became the world’s third largest trader in 2004. Currently, it consumes about six million barrels of oil a day; and according to some projections, it will need three times that amount in 20 years. Consequently, Nicholas Lardy of the Washington-based Institute for International Economics sees the Unocal deal as a mere drop in the China’s oil bucket.

"Unocal is a relatively small company," Lardy says. "It produces two to three-tenths of one percentage point of global output of gas and oil. I don’t see any reason that the transaction should be blocked on national security grounds."

Analysts like Lardy view China’s transactions in the United States as part of Beijing’s efforts to be more competitive in an increasingly globalized economy. For example, political scientist Eric Heginbotham of the Council on Foreign Relations says China is looking for quick ways to break into foreign markets as its economy expands.

Heginbotham: "Their purchases of US brand names can be seen largely as an effort for them to secure brands that are recognizable in the West, particularly in the United States, but also elsewhere. These are companies that have solid production capabilities, but it’s very difficult to do the branding that’s necessary to make them recognizable outside of China. So this is a way to sort of short-circuit the process that generally takes years or decades to build a brand name, and just go ahead and purchase the name."

Heginbotham adds that China’s scramble for resources in the US, Latin America and Africa is an effort to secure equity stakes and resources. But he acknowledges that the strategy, while economically driven, employs political means such as bolstering a regime in a given country in return for guaranteed access to energy resources.

"Many of their deals, particularly on the resource side in Latin America and Africa involve political tie-ups with local regimes, and the offer of political and other types of economic support in exchange for privileged access to resources, energy, oil, as well as other types of mineral resources," Heginbotham says.

All of which alarms experts who point out that the US and China are the world’s number one and two oil consumers, respectively, and that their needs will only increase. Travis Tanner, Assistant Director of Chinese Studies at the Nixon Center acknowledges that the current global energy market is a cause for concern.

"You're talking about oil production running at almost capacity, over 90 percent right now," Tanner says. "And if we take into account] China’s growing economy, and the United States’ and the rest of the world’s growing dependence on oil, then it’s obviously not moving in a positive direction."

Some analysts contend that the US and China are already engaged in an oil rivalry, with China losing its presence in oil-rich Iraq to the US. Analysts skeptical of Beijing’s motives compare the Chinese challenge to the threat posed by Italy and Spain’s fascist regimes to Great Britain and France in the 1930s. Among them is the University of Maryland’s Peter Morici, who warns that China is using Wall Street tactics to mask its military ambitions, adding: "I think that China is cynically playing the instincts of Wall Street by trying to distract attention from its military agenda. The fact is that it serves China’s interests to distract America, to catch us sleeping."

Morici goes on to compare China’s quest for resources to Japan’s drive in the 1930s to control resources and raw materials, which eventually led to war. But many experts dismiss these comparisons, or any parallels between China’s foray into US markets and Japan’s investment spree in the 1980s, saying China’s transactions are market-driven. Some, including Tanner, contend that it is in America's national interest to encourage an active Chinese role in the global economy.

"Their profitability in the domestic market isn’t so great," Tanner says of Chinese companies. "They’re growing. They’re trying to compete on the international market, and I think we should be encouraging that. We want China to become a part of the global economy as much as possible. That just makes them have more of a stake, and I think that helps reduce concern over security issues. As China and the US become closer, intertwined economically, I think it’s a stabilizer.”

Ultimately, however, most analysts agree that China’s proposed acquisitions should be viewed as a wake-up call for American leaders to prepare US markets for a potential flood of competition--notably from China.

Thursday, July 28, 2005

Republican leaders in the US House of Representatives have succeeded 255 to 168 votes in a second attempt to push through legislation aimed at putting more pressure on Beijing to change its trade practices.

Earlier this week, majority Republicans failed in their attempt to have the House approve legislation called the US Trade Rights Enforcement Act, which failed to gain the required two-thirds majority required for passage.

Among other things, the bill would enable US companies to seek additional duties (taxes) against heavily-subsidized products from China and other so-called "non-market" economies, and also address currency manipulation and intellectual property issues, and require new reports on US-China trade.

Republicans brought the legislation back to the House floor under different debate rules Wednesday, portraying it as an effective tool for trade enforcement.

They also hoped that by pushing the bill through in close proximity to the Central American Free Trade Agreement (CAFTA) being considered by the House, they could help improve chances for that separate legislation being approved.

Doing so would also shine a spotlight on Democrats taking the politically risky step of voting against a measure aimed at helping the United States stand its ground in the trade relationship with Beijing.

Democrats accused Republicans of limiting debate, and blocking proposed amendments that might do a better job of addressing issues in the US-China trade relationship. One Democratic Congressman, Jim McGovern of Massachusetts, described the bill as "largely symbolic."

The Bush administration says the recent decision by China to allow a limited devaluation of its currency, along with ongoing negotiations on other issues, are proof current policies are helping to level the playing field in trade with China.

Democrats attempted but failed to have the House approve their alternative bill they asserted would be more effective regarding currency issues with China.

There is companion legislation in the Senate to the House bill on trade with China, but it has yet to come to a vote in that chamber.

Debate in the House came as several congressional committees examine other issues relating to China, including Beijing's efforts to acquire energy assets, China's growing military power, and its economic influence in Africa.

Wednesday, July 27, 2005

An infectious disease that has killed two dozen people in Southwestern China has sparked fears that bird flu or SARS (Severe Acute Respiratory Syndrome) has resurfaced. The World Health Organization says that although it is not disputing China's contention that a known pig-borne bacteria has caused the latest deaths, the high mortality rate is alarming.

China's Ministry of Health says a bacteria (streptococcus suis) that regularly infects pigs has killed at least 24 people in Sichuan Province since last month--mainly farmers--and has infected more than 100. Chinese officials say they have seen no indication that the bacteria is spreading by person-to-person contact.

WHO officers describe the situation as disconcerting, however, because of the unusually large numbers of victims involved. Says one expert: "We don't understand why there are so many people getting ill. [Normally] when this disease appears, one or two, maybe three people get ill, in contact with pigs. Why all of a sudden are we seeing 117 cases of this? That is not clear to us and we don't know why that is happening."

China has been hard hit by infectious diseases in the past several years. SARS, or Severe Acute Respiratory Syndrome, started in Southern China in late 2002 and spread around the world, killing almost 800 people. Bird flu, caused by a virus that can be lethal to human beings, has affected flocks of chickens and wild birds in many parts of the country.

The WHO is monitoring the situation; and Chinese authorities have taken steps to keep the bacteria from spreading, including prohibiting farmers from slaughtering or processing infected pigs.

Tuesday, July 26, 2005

American officials are increasingly concerned about the growing energy demands of both China and India, but say the United States is actively working to engage both countries in cooperation over energy interests. A Congressional committee has been holding hearings on the subject.

Robust economic growth in China and India has led to steep increases in energy use in both countries, an issue that was the focus of a Senate Foreign Relations Committee hearing on Tuesday.

The energy sectors in both countries are still dominated by coal, but both countries have also become growing consumers of natural gas and oil on the world market.

International Energy Agency figures project that overall demand for energy in China and India will approximately double by 2030. US demand is expected to grow by only as much as 50 percent.

Assistant Secretary of State Anthony Wayne said Washington is concerned about efforts by Beijing and New Delhi to reach out to countries American companies have largely stayed away from, such as Burma, Iran, Sudan and Venezuela.

Said Wayne: "In the case of Sudan, we also engaged in serious dialogue with the Chinese, both in the bilateral sense but also in their role on the (U.N.) Security Council, as we were all working together to encourage a North-South Peace agreement, which is now going forward, as we continue to work seriously to restore peace and security to the Darfur region. In all of these cases, we have worked very hard to explain to the Chinese and to others, why we believe it is troubling, it undermines the international community's efforts."

Wayne emphasized room for cooperation and listed ways the US is working together with the two Asian giants, especially in such regional organizations as the Asia Pacific Economic Cooperation forum, or APEC.

The US, China and India all rely largely on imports of oil to meet energy demands. Undersecretary of Energy David Garman said this binds the three countries in what he referred to as "an oil co-dependency."

"We're all more or less in the same boat, where we must invest in new supply, new technology, alternatives to oil over the long term," Garman said. "And I don't think there's any other way to proceed."

Garman pointed to the International Partnership for Hydrogen Economy, which was established in 2003, as a concrete example of how the countries can work together.

"China and India are both charter members of this multilateral effort, which is designed to get us to affordable hydrogen fuel cell vehicles that need no petroleum and emit no pollutants, by 2020, or so," he said. "They've signed up to that vision, and we are working fervently with them on these technologies and methods of producing a common hydrogen fuel that all the nations of the world could produce from a variety of domestic, available, primary energy resources."

Garman said that if each nation could produce its own fuel, it could ultimately make concerns over conflict in the world's energy markets moot.

EDITOR'S NOTE:The following in-depth analysis was written by Kathy Lien, Chief Currency Strategist at Forex Capital Markets. Kathy is responsible for providing research and analysis for DailyFX, including technical and fundamental research reports, market commentaries and trading strategies. A seasoned FX analyst and trader, prior to joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross Markets and Foreign Exchange Trading. She has vast experience within the interbank market using both technical and fundamental analysis to trade FX spot and options. She also has experience trading a number of products outside of FX, including interest rate derivatives, bonds, equities, and futures.

Kathy has written for Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO Magazine. She is frequently quoted on Bloomberg and Reuters and has taught seminars across the country. She has also hosted trader chats on EliteTrader, eSignal, and FXStreet, sharing her expertise in both technical and fundamental analysis. For more information, please visit www.dailyfx.com or www.chinarevaluation.com

Dropping the Peg

After years of speculation, China has finally dropped its decade long peg to the US dollar. The one major currency pair that will be impacted the most by the revaluation announcement would be the dollar against the Japanese Yen (USDJPY) and indeed the pair slid 200 pips, or points, following China's announcement.

What China Did

China adjusted the RMB peg to 8.11, which is 2% higher in value against the dollar. The pegged value of the RMB has been adjusted to 8.11 from 8.31. This rather modest revaluation of 2.5% will for the most part do little to reverse or relieve the burgeoning US trade deficit. But modest as it is, the revaluation does have significant political and market implications.

Immediate pressure on China to revalue its currency should move to the back seat for at least a few weeks. However, despite the move, we would not be surprised to hear some protests from US Senators that the revaluation move was too small and that China needs to make a much more concerted effort to allow its currency to increase in value, especially since 2.5% pales in comparison to the RMB's predicted undervaluation of 30-40%.

China is hanging onto its 0.3% percent trading band against the dollar, which means that even with this move don't expect a lot of volatility in the currency pair.

Also, speculators will probably stick around for a while longer which means that even though China has announced a move on its currency, the topic of revaluation and further steps by China will remain in the limelight.

The Real Story

China will move to a managed float against a basket of currencies. This is the real story. Not many details have been disclosed on this front, but the People's Bank of China (PBOC) has written the following on their website: "The trading prices of the non-US dollar currencies against the RMB will be allowed to move within a certain band"-- which will be announced later by the PBOC.

We suspect that China will take an approach similar to that of Singapore, which is to float their currency against a basket of other currencies within a tight trading band, while not disclosing the exact percentage make-up of the basket to prevent speculators from attempting to manipulate their currency. Given that China exports a large percentage of its goods to not only the US, but also the European Union and Japan, the basket would naturally have to include Euros as well as Japanese Yen. This in of itself could be very positive for both of those currencies. It's worth recalling that those currencies were indeed apart of the currencies that China's internal interbank system was trading in May.

China's Motivations

China has many reasons to want to revalue their currency. The most apparent of which is the country's political motivation to get approval for deals such as Unocal or the new speculation that they may dropping their bid of Unocal for other US oil producers. The US time stamp for a move by China in August could be an unwritten agreement between the two countries that would pave the way for a buying spree by the Chinese government and Chinese corporations.

The revaluation also makes imports cheaper for China. This comes at a critical time when commodity prices are skyrocketing. The revaluation immediately makes prices of commodities such as oil 2.5% cheaper than they were yesterday.

What does it mean for the markets?

China's move has ramifications for all of the financial markets. The most significant of which will probably be in US treasuries. As the world's second largest holder of US treasuries, China's revaluation and move to a basket float significantly reduces their need for US treasuries and could potentially take away a big buyer from the market. If this is the case, it will cause bond prices to slide and long-term yields to rally, which could offset some of the additional pressure on the Federal Reserve to continue raising rates.

If China begins to dump US treasuries, we could see the yield curve conundrum begin to fix itself.

The reduced demand for US treasuries and the possibility of increased demand for other currencies such as Euros and Japanese Yen could be very negative for the US dollar. Right now, the dollar is holding somewhat steady against the Euro thanks to the fact that China has yet to announce the components within the managed float. Once they confirm that the Euro will be included in the basket, the single currency could skyrocket.

As for the Japanese Yen, which is the proxy for Asia strength, the currency should continue to benefit from news of China revaluation. Malaysia has already followed suit by scrapping their own Ringgit peg and also adopting a managed float. Japan is quite pleased with the move and for the immediate term, it should eliminate any fears of Japanese intervention. The revaluation of the RMB makes Japanese goods more competitive on a relative basis against Chinese goods.

The US stock market should have a mixed reaction. Shares of companies such as Wal-Mart and Target have and will probably continue to sell-off because the revaluation means that their cost of imports will increase. So Wal-Mart and Target will either have to increase prices or take a cut out of profits.

Shares of manufacturing companies that compete against China should rise along with shares of companies that are targets for Chinese acquisition. The revaluation makes it cheaper for Chinese companies to snap up US companies while at the same time possibly giving them more political sway.

This could also be very positive for the commodity markets, with the revaluation immediately reducing the cost for commodities.

More to Come

There will definitely be more to come in the world of revaluation. China has to still announce the details of their managed float against a basket of currencies. This announcement could result in another sharp move in the currency market. The 2.5%revaluation is modest at best - expect continued pressure on China to institute a larger revaluation. The managed float will allow them to gradually adjust the value of the RMB while at the same time maintaining an air of uncertainty and leg up over speculators.

News of further Chinese bids on international companies should continue to flow into the market, especially since the country now has a massive amount of US dollars that may not need to be invested in as many US treasuries.

Thursday, July 21, 2005

Chinese companies have been flexing their muscles recently by acquiring or bidding for high profile Western brands. Chinese firms face significant challenges as they seek to expand through acquisition.

Business analysts say it is inevitable that as Chinese companies accumulate wealth, they look for acquisitions and investments overseas.

The companies are seeking to expand their market, acquire new technology and build international brands. One way of doing that is to piggyback on established competitors.

Computer maker Lenovo is a household name in China, but few in the US had heard of it until it bought the personal computer business of IBM last year for $1.75 billion.

Also last year, the French television manufacturer Thomson, maker of the RCA brand, was sold to China's TCL.

But now Chinese companies are realizing that acquiring overseas assets may not be that easy. Two high-profile Chinese bids suffered setbacks this week.

Haier, a Chinese appliance maker, lost out to a higher bid from Whirlpool for US household appliance manufacturer Maytag.

And the board of US oil company Unocal has maintained its support for a takeover bid from Chevron, over a larger $18.5 billion offer from China's CNOOC.

Some US lawmakers have opposed CNOOC's bid on the grounds that it would mean a US oil company being controlled by a firm whose majority owner is the Chinese government.

Politics aside, business analysts say some Chinese companies may stumble because of a lack of international experience.

"Expanding internationally is very hard," says Michael Thorneman, a mergers and acquisitions expert with Bain & Co in Hong Kong. "It is highly likely that a number of these Chinese firms are going to struggle as Western companies struggled in markets outside their domestic terrain."

Analysts point to the lessons of the 1980s, when Japanese companies made several high-profile acquisitions in the US. Some of those deals eventually unraveled because of management culture conflicts and financial difficulties after Japan's asset bubble burst in the early 1990s.

How far will Chinese companies go to get what they want? Stock analysts in Hong Kong, where CNOOC is listed, say the Unocal bid would bury the company in debt; but the company's doggedness also reflects China's determination to find stable sources of energy for its fast growing economy.

After months of publicly resisting pressure to revalue its currency, China has taken the first step toward total liberalization of its exchange rate: it has revalued the yuan for the first time in a decade.

The Chinese Central Bank's move--which could lead to a free floating currency--should placate criticism from abroad, especially in the United States, where political and labor leaders, commentators and other critics claim China has kept the yuan low to boost exports.

The new rules scrap the yuan's peg to the dollar, and tie it instead to a basket of currencies. This effectively strengthens the yuan by 2.1%, to 8.11 to the dollar.

Shortly after China's announcement, the Malaysian government released the ringgit's eight-year peg to the dollar.

On Wednesday, US Federal Reserve Chairman Alan Greenspan, repeated his view that it is in China's interest to allow its currency to have a freer market flow. He said continuing to peg the yuan to the US dollar could cause serious problems for China's economy.

For all the talk of free market competition, a revalued yuan could ironically have a negative impact on the US economy because reduced Chinese exports could lead Beijing to reduce its investment in US Treasury securities. This in turn would no doubt cause the US government to raise interest rates in an effort to attract foreign cash--on which the US is terribly reliant--leading to higher interest rates for domestic borrowers--from home owners and home buyers seeking mortgages to companies in need of capital to survive and expand--with potentially disastrous results.

Wednesday, July 20, 2005

A report issued Tuesday by the office of US Defense Secretary Donald Rumsfeld says China is at a "strategic crossroads" as it works intensively to increase and modernize its military capabilities. The annual report on China's military, required by congress, was delayed for several weeks as officials from several US government departments worked to consolidate their views in the document.

The report portrays an active, multi-faceted and secretive Chinese military modernization program, encompassing new and improved air, sea, missile and outer space systems, as well as restructured ground forces that are more mobile, more lethal and more technologically advanced. The report says China has drawn on lessons from the US and allied military campaigns in Iraq and the NATO mission in Serbia both to improve its own plans, and to detect weaknesses in potential adversaries.

It says China's military modernization includes efforts to make rapid leaps in some of the most modern systems under development in other countries, such as improved military satellites, anti-satellite weapons and the capability to disable an adversary's computer networks and communications systems.

The result, according to the report, is a change in the Asian military balance and the potential for challenging US and other modern foreign forces operating in the region. But the report says China's ability to project military power beyond Asia remains limited.

The Defense Department report says the main focus of China's military planning continues to be Taiwan - which it says leaders in Beijing are determined to prevent from acquiring independence. That includes plans for quick, limited strikes on the island by missiles and aircraft in order to remove leaders or convince them to change their plans before any US or other foreign force could intervene, as well as efforts to prevent foreign forces from getting to or operating in the air and sea lanes close to the Taiwan Straits. The report indicates that approach appears to be taking precedence over any large-scale invasion of the island, even though China is becoming more capable of doing that.

The report says China deploys its most advanced new military systems to the coastal region directly across from Taiwan, including more and better short and medium range missiles, but that most of China's military hardware remains somewhat less capable. Still, some of the more modern systems are mobile, including the medium-range missiles, which the report says can now reach from Indonesia in the south to Russia's Kamchatka Peninsula in the northeast and nearly to Moscow in the northwest. That area includes a large percentage of deployed US Pacific forces.

Rumsfeld declined Tuesday to characterize any potential threat from China, and instead referred reporters to the report itself.

"It's a very accurate characterization of behavior, the behavior and the collective decisions that are being made in that country with respect to military investment and acquisitions," he said.

The report says China is working to improve its military largely by acquiring hardware and technology from abroad. It lists Russia as China's main foreign military supplier, but also says Israel has provided some key technology, and that European countries and even the United States have sold some important military equipment to China.

Rumsfeld said the report provides further evidence to support US opposition to the European Union's desire to lift its arms embargo against China.

"It clearly points up the reason that the president and the United States government have been urging the EU to not lift the arms embargo on the People's Republic of China," Rumsfeld said.

Specifically, the report says lifting the EU arms embargo would help China improve its weapons systems and its ability to produce its own modern military equipment, would encourage Russia to sell more advanced military equipment to China and would give China easier access to Europe's modern military training methods, logistics expertise and management practices. The report says Europe's proposed new system of controls on military exports to China is "inadequate" and lifting the embargo would have "serious and numerous" consequences.

The report also expresses the concern that China's increased military capability could make Chinese leaders more likely to use force against Taiwan or elsewhere - a situation the report says could result in dangerous miscalculations that "could lead to a full-fledged conflict." But at the same time, the report says China's military is becoming more capable of using force in limited and relatively precise ways.

The Defense Department report also expresses concern that for all the United States knows about China's military development, there is much it does not know. It says US analysts knew nothing of several new Chinese weapons systems until they were officially unveiled. The report says the US does not even have a firm figure for China's fast-growing defense budget, which it estimates could be as much as $90 billion, three times the figure China has officially announced for this year.

Even that official figure of about $30 billion is double the official figure for the year 2000. If the US estimate is right, China would have the world's third largest defense budget, after the United States and Russia. And the report says China's strong economic growth and desire to further modernize its military are being coordinated and are fueling each other.

The Defense Department's report also warns Taiwan that it must develop countermeasures to avoid being "quickly overwhelmed" by China's growing capabilities. It says Taiwan's defense spending has declined steadily in real terms during the last ten years, and that although Taiwan, with US support, tries to maintain advantages in selected key military areas, the growth of China's capabilities is "outpacing" that effort.

Monday, July 18, 2005

A regional group bringing together China, Russia and several central Asian countries has called for the withdrawal of American troops from bases in Uzbekistan and Kyrgyzstan. The group, known as the Shanghai Cooperation Organization, or SCO, is a relatively new entity.

It started in 1996, and was first known as the Shanghai Five, bringing together Russia, China and three central Asian states: Kazakhstan, Kyrgyzstan and Tajikistan. Those three countries share borders with either Russia or China - or both.

According to Martha Brill Olcott, a central Asian expert at the Washington D.C.-based Carnegie Endowment for International Peace, the SCO was originally organized to resolve disputed border issues between member nations.

"Once it got through that first threshold, the member states decided that they saw a need for an organization that had a broader economic and security mandate, something that would, in theory, at least, mirror the kinds of functions that the Organization for Security and Cooperation in Europe takes for itself," she says. "It has yet to evolve into something that institutionalized, to be sure. But once it set this broader mission for itself, it was possible for other states to join, and to accept the invitation to join, because, now, it was no longer just border states. It was at that point that Uzbekistan was approached and accepted membership."

Once Uzbekistan joined, in June 2001, the group became known as the Shanghai Cooperation Organization.

Analysts say it is intriguing to have a regional entity that has Russia and China involved.

"Central Asia has historically been part of Russia's back yard, or what the Russians sometimes refer to as the near abroad," says Philip Saunders, senior research fellow at America's National Defense University. "And, of course, during the Soviet Union days, it was formally part of the Soviet Union. Once that broke up in 1991, the countries that had been Soviet republics became independent countries. So, it's an area where Russia has always taken a parochial interest, and regarded it as part of its back yard, and been jealous of any foreign involvement or foreign interest there. Then, for China, once the Soviet Union broke up, they became very actively involved in the region, with one of the initial reasons being that they wanted to secure diplomatic recognition of all the states, in order not to provide an opportunity for Taiwan to establish diplomatic relations."

Many analysts see China as the SCO's driving force. They say Beijing sees the group as a means of expanding its influence in the region. One of those experts is Filip Noubell, with the London-based Institute for War and Peace Reporting. He's based in Bishkek, Kyrgyzstan's capital.

It's a sort of new institution, a new entity which is strongly led by China," he says. "And, that is the most interesting part, because China used to consider central Asia still as a former Soviet area, and was quite little informed about the reality of all the central Asian states that are actually very different. China does share borders with three of them: Kazakhstan, Kyrgyzstan and Tajikistan. It does not have geographic borders with Uzbekistan, but China is very interested in some of the natural resources that are in central Asia, mostly oil and gas, obviously, because of its booming economy. So, Beijing is finally acknowledging that this region is key, is central for its foreign policy, for its economic policy, and, not only because of its natural resources, but also because of the sort of reshaping of the entire region."

Since the breakup of the Soviet Union in 1991, the US has been involved in central Asia, supporting new governments there, even though many of them are authoritarian. Washington is also interested in getting US companies' access to the energy resources in the region.

After 9/11, the US presence changed dramatically, with American forces stationed at two bases - one in Kyrgyzstan and the other in Uzbekistan. They are there to support the war against terrorism in Afghanistan.

"So, that's the new dimension in the region, and it's one that has made both China and Russia nervous, to have US military forces operating in central Asia - for Russia, in states that used to be part of the Soviet Union, for China, in states that share a common border," says Philip Saunders. "And then, you add one other new element, which is the wave of democratization, or at least political change, taking place in central Asia, in Georgia, in Ukraine, where you have had authoritarian governments being overthrown by popular movements, although it's fair to say that doesn't always mean being replaced by real democratic leaders. But that's another new dimension, and for China and Russia, for different reasons, that's one that is seen as potentially dangerous."

At a recent summit meeting, SCO countries warned against outside meddling, calling for non-interference in internal affairs--a veiled criticism of the US. They also called for the US to set a deadline for the pullout of American forces from central Asian bases.

In a move certain to further damage relations with China, the Japanese government will allow test drilling for oil in a disputed region of the East China Sea. Thirty-five years after it filed an application for test drilling, Japan's Teikoku Oil has been granted permission for experimental exploration in the area.

Japan's Trade Ministry denies the concession was finally approved to counter growing natural gas and oil exploration in the contested waters by China.

Teikoku Oil originally applied for exploration rights in the area in 1969, but the Japanese government never acted on the request before last Thursday, because of the unsettled demarcation of the sea boundary between the two countries.

Sunday, July 17, 2005

China's president has congratulated the newly elected leader of Taiwan's main opposition Nationalist Party, which favors closer ties with Beijing, in contrast to the independence-leaning ruling party.

On Saturday, Taiwan's Nationalist Party, known as the KMT, elected Taipei Mayor Ma Ying-jeou as its new chairman. The party supports eventual reunification with the mainland.

Ma, who won the party poll by a landslide, immediately promised to lead the KMT back to power in the next presidential elections.

"When I become the chairman of the KMT, I will lay out a comprehensive plan of reform, which will enable the KMT to win back power in the year 2008," he announced.

In a congratulatory message to Ma, Chinese President Hu Jintao said he hopes the KMT and China's Communist Party, together with compatriots on both sides of the Taiwan Straits, will continue to promote peaceful and steady cross-Straits relations.

Beijing has been developing ties with the Taiwanese opposition, in a bid to isolate the island's independence-leaning president, Chen Shui-bian.

Beijing has hosted leaders from three of Taiwan's opposition parties this year, but refuses to open direct dialogue with the governing Democratic Progressive Party, until it recognizes Taiwan as part of "One China."

Political relations between China and Taiwan have been poor since the Democratic Progressive Party came to power in 2000. Beijing considers the ruling party's attempts to hold referendums and introduce constitutional amendments as steps toward declaring formal independence.

China considers self-governing Taiwan a breakaway province that must eventually be reunited with the mainland, by force if necessary.

Ma will replace Lien Chan, who ended decades of hostility between the KMT and China's Communist Party (CCP)when he visited the mainland in April. His trip was the highest-level contact between the two sides since 1949.

In an epic struggle for control of China, the KMT and CCP were allies against China's warlords until 1927, when the KMT--ironically backed by Stalinist Russia--turned violently against the CCP and the party's socialist, trade union, and intellectual supporters. The bloody represssion, immortalized in Andre Malraux's remarkable historical novel Man's Fate (La Condition Humaine), led to the Chinese civil war that culminated in the KMT's defeat and flight to Taiwan, while sowing the seeds of the Sino-Soviet split that divided world Communism throughout most of the Cold War.

China hopes to launch its second manned spaceflight in early October, with plans calling for two astronauts to circle the Earth for five to six days.

Sun Weigang, director of the Space Department at the China Aerospace Science and Technology Corporation, says two astronauts will be selected for the mission from a group of 14 air force fighter pilots.

The official told state China Daily that the spacecraft Shenzhou Six will be used for the mission - China's first since a successful 21-hour flight in 2003.

Most details of China's space program have been kept secret over the years, but the successful mission two years ago has led to more openness. China's leadership is committed to landing an unmanned probe on the moon by 2010.

Chinese scientists also said Friday they intend to place two meteorological satellites in orbit, to improve weather forecasting before the 2008 Olympics in Beijing; later this year they will launch two additional orbiters, described only as scientific and experimental satellites capable of sending payloads back to Earth.

Friday, July 15, 2005

A US State Department spokesman has called remarks by a Chinese military official about China's willingness to use nuclear weapons against the United States highly irresponsible.

Chinese Major General Zhu Chenghu's told a group of foreign journalists that China would be prepared to use nuclear weapons to respond to US interference in any future conflict over Taiwan.

The general said under what he calls "war logic" China sees itself as unable to win a conventional war and would have to rely on its nuclear arsenal.

General Zhu, who is a professor at China's National Defense University, said the views expressed are personal and not those of the government.

US State Department official Sean McCormick told journalists Friday the US is not a threat to China. He said he hopes the comments are not a reflection of the Chinese government's position and called the remarks unfortunate.

A senior military official in Beijing said China would be prepared to use nuclear weapons against the United States if Washington intervenes in any future conflict over Taiwan.

Major General Zhu Chenghu, a professor at China's National Defense University, told a group of foreign journalists that he does not anticipate war between China and the US. However, in General Zhu's words, "If the Americans are determined to interfere" on the Taiwan issue, then China "will be determined to respond."

Such a conflict would be extremely costly to both countries, the general said, but under what he termed "war logic," China would have to rely on its nuclear arsenal, because it sees itself as unable to win a conventional war against the US.

Zhu told the journalists he was expressing his own views, and not those of the government. China has said many times that that it will not be the first to use nuclear weapons in any military conflict.

The military official's remarks were published Friday in a number of major newspapers. The reports say General Zhu spoke extensively and easily in English as he discussed China's position that Taiwan is a renegade province, not an independent state.

Those present quoted General Zhu as saying, "If the Americans draw their missiles and position-guided ammunition on to the target zone on China's territory, I think we will have to respond with nuclear weapons." He is said to have added that China would act on the principle that its warships and aircraft are part of its territory.

Wednesday, July 13, 2005

There has been more debate in the US Congress over the effort by China to acquire Unocal, the American oil company. Many lawmakers are concerned about the economic, geopolitical and even military implications of such a deal.

When the House of Representatives overwhelmingly approved a resolution two weeks ago describing the Chinese bid for Unocal as a threat to US national security, the government in Beijing was quick to respond.

Aiming its words directly at US lawmakers, China accused them of "politicizing economic and trade issues," and called on Congress not to interfere in what it called normal commercial exchanges between the two countries.

Earlier, the House had approved another measure aimed at blocking the Bush administration from approving a China-Unocal deal.

On Wednesday, the House Armed Services Committee considered a range of issues in connection with the Unocal matter, from China's expanding energy needs and military capabilities to American dependence on imported oil.

James Woolsey, a former CIA director, is among those who believe the Unocal sale is part of a Chinese strategy to acquire strategically important assets.

"China is realistically assuming that there may be a great world scarcity in oil, because potentially of terrorist attacks and otherwise, or just because of natural growth in the market, thereby driving up the price and it is doing everything it possibly can to ensure that it has access that could replace the access that other countries, including the United States have," Woolsey says.

US lawmakers have focused on the role a Chinese acquisition of Unocal could play in assisting Beijing's military buildup.

"China is building a military which will, at some point, be formidable if it continues at the same pace it is growing at right now," said Congressman Duncan Hunter, the Republican chairman of the Armed Services Committee.

Jerry Taylor, director of natural resources studies at the CATO Institute, believes the Unocal deal would not be harmful, noting there have been other foreign acquisitions of US assets.

Says Taylor: "I don't think that this is anything out of the ordinary as far as the US economy is concerned. It is certainly not unprecedented for foreign-owned oil entities to buy oil assets in the United States and far larger assets have been sold to these entities in the past."

Frank Gaffney, a former Reagan administration official and noted critic of China who heads the Center for Security Policy, asserts China's attempt to acquire Unocal is part of a larger strategy. As Gaffney sees it, China "views this very differently from the free market capitalist 'Hey as long as it makes sense by the numbers' approach, that too many American businesses have taken. And if we don't stop approaching these things, especially looking at them piecemeal, we're going to wake up defeated economically, and perhaps without a fight militarily."

China's National Offshore Oil Company is 70-percent owned by China, a fact many US lawmakers have cited to support their strong opposition to a deal.

In a resolution approved at the end of June, the House of Representatives called on President Bush to conduct a thorough investigation of any deal in which the Chinese company acquires Unocal.

Shareholders of California-based Unocal will vote next month to decide between that bid, worth about $18.5 billion, and a lower-priced bid already approved by the Unocal board of directors from US-based Chevron Corporation.

Foot massage parlors are sprouting up all over China. In Beijing and other big cities there are shops on many street corners, and foot massage chain stores employ thousands of workers. This mushrooming industry is producing thousands of new jobs for the blind, who traditionally in Asia have been trained to do massage.

The Chinese government says more than five million people work in the foot massage trade. Most of them come from poor rural areas, and getting jobs in the city rubbing other people's feet offers a way out of poverty.

Workers at some shops have only minimal training, leaving them wide open to competition from highly trained blind massage therapists, who promise to deliver medicinal benefits at a competitive price. Cao Jun has been blind from birth and he owns three foot massage parlors.

"We have an advantage in terms of touching and feeling, so we are very confident that we do a better job than ordinary people," he says.

Massage has traditionally been considered a profession for the blind in China, Japan and other Asian nations. Now the Chinese government is encouraging the blind to take up massage as an occupation that will allow them to live independently. Special massage schools have set up four-year programs, giving sightless students far more training than their sighted counterparts.

Cao says his 10-year-old business is strictly for medicinal massage based on ancient Chinese theories of reflexology, which say that points on the feet correlate to parts of the body and that specialized foot rubs, which hit the different points, promote overall health.

His massage parlors employ 32 workers. One of them is 23-year-old Guo La, who lost her sight at 17 in a bicycle accident.

"When I first lost my eyesight, I lost hope," she says. "But after I studied the massage skills, I find my life is coming back again."

Tuesday, July 12, 2005

State media report the death toll in a mine explosion in Xinjiang region has increased to 66, with 17 miners still missing.

Xinhua news agency reported Monday that four of 87 miners escaped the early-morning blast at Shenlong Coal Mine in Fukang County. Xinhua said the explosion was caused by a buildup of gas in the shaft. Local authorities say it is unlikely the missing miners survived.

The regional government has asked other area coal mine operators to suspend production and make needed safety improvements.

China's coal mines are the world's most dangerous, with explosions, floods and fires killing thousands of workers each year. Inadequate safety equipment and lax safety rules are often blamed for the accidents.

Monday, July 11, 2005

The United States has urged China to provide larger market access for US businesses and to deliver on promised anti-piracy measures, saying illegal copying costs American companies billions of dollars a year.

During the annual meeting of the US-China Joint Commission on Commerce and Trade, US officials praised China's economic development, but said US businesses should be given more access to Chinese markets.

Commerce Secretary Carlos Gutierrez led the US delegation to the one-day talks, which also included discussions on protection of intellectual property rights and the ongoing dispute over Chinese textile exports.

Speaking in Beijing, Gutierrez said although progress had been made in gaining US companies access to the $8 billion a year Chinese software market, much more needs to be done.

"China has full access to the US market," he said. "American Companies simply want the same access in China."

Gutierrez also welcomed Chinese promises to file more criminal charges against violators of intellectual property rights, but stressed the US wants to see significant results.

Vice-minister Li Dongsheng, of China's administration of industry and commerce, rejected criticism that China is not doing enough to enforce anti-piracy laws.

"The amount of applications for trademark protection in China and the substantial increase from foreign countries fully illustrate that China's system of trademark laws is sound, that these special rights protections are strong, and that foreign businesses have confidence in China's market environment," Li said.

Li also says fighting piracy is a process and China cannot be expected to reach the same level of enforcement as western nations overnight.

China had said its delegation leader to the talks, Vice Premier Wu Yi, would press the United States about its restrictions on Chinese textiles imports, which surged this year after a global quota system was abolished in January.

Gutierrez gave no indication that Washington intended to change its policy on textiles, but said the two sides had agreed to continue consultations.

The high cost of energy is raising fears of a slowdown in Asian economies. The cost of oil is dominating this week's Asia business news.

A report from investment bank Morgan Stanley says the heavy burden of oil prices, which recently climbed above $60 per barrel on global markets, could weaken China's growth and push other Asian economies into recession.

Andy Xie, chief Asia economist at Morgan Stanley, says until now the growth in China's property sector has hidden the effects of rising oil prices.

"I think this is going to be a problem for the economy," Xie says. "For other economies that haven't had a property bubble to offset the oil costs, the impact has been more dramatic. Look at Thailand and Taiwan and Korea - the growth rates are really low."

Massive supplies of oil are needed to fuel Asia's quickly growing industries. The region accounts for about 29 percent of the world's oil consumption.

Xie says high demand for oil in China was driven last year by its large automobile industry and heavy reliance on diesel generators in factories; but demand is softening as more coal-fired power plants come online and Beijing invests in public transportation.

Xie says financial speculators will continue to pressure the market, due to perceptions that oil demand in Asia will remain at current levels.

Says Xie: "The oil traders still want to ignore the evidence of an economic slowdown in Asia. The economic data in the next coming months will increasingly point to a sharp slowdown in Asia. Only then these guys may back off."

Sunday, July 10, 2005

US Secretary of State Condoleezza Rice has urged China to talk to rival Taiwan and the Dalai Lama, while rejecting calls to pull US troops out of Central Asia.

Rice was in Beijing to discuss North Korean nuclear disarmament with Chinese leaders. But she also covered other issues, including regional security, human rights, and trade.

During a press conference following the meetings, she rejected a call by the Shanghai Cooperation Organization, a regional security grouping led by China and Russia, for the US to set a deadline for leaving Central Asian states, including Afghanistan.

"It is our understanding that the people of Afghanistan want and need the help of US armed forces," Rice said.

Rice also said that while Washington is concerned about Beijing's increasing military build-up, the US does not view China as a threat.

"We just take note of the fact that there is a significant military build-up going on, that we have concerns about the military balance, and of course, that the US continues to modernize its own forces so that we can continue to be a force for stability and peace in this region," she said.

She also urged China to talk directly to the elected government in Taiwan, following recent visits to the mainland by Taiwanese opposition leaders.

Beijing has said it will not meet with Taiwan's ruling party until it recognizes the self-ruled island as part of "one China." China considers Taiwan part of its territory and has threatened to reunite it with the mainland by force if necessary.

The Chinese military has hundreds of missiles pointed at Taiwan; and many analysts are concerned that an all-out attack, once thought to be a romote possibility, could be in the cards in coming years.

Secretary Rice also asked Chinese leaders to reach out to the exiled Tibetan spiritual leader the Dalai Lama, saying he poses no threat to China.

Among the economic issues discussed were China's fixed currency exchange rate and lack of protection for intellectual property rights.

Rice left China for Thailand with plans to visit Japan and South Korea.

Saturday, July 09, 2005

After more than a year of refusals, North Korea has agreed to rejoin six-nation talks aimed at ending its nuclear weapons programs. The announcement came as US Secretary of State Condoleezza Rice arrived in China for talks on the North's nuclear programs, and followed secret talks between US and North Korean officials in Beijing.

North Korea announced it would return to the six-party talks the same evening US Secretary of State Condoleezza Rice arrived in Beijing to discuss with Chinese leaders how to get North Korea back to the negotiating table.

Friday, July 08, 2005

China's audacious attempt to take over a US oil company poses a threat to US National security. That's the view of some American lawmakers who are conducting a war of words with the Chinese government over the deal.

At issue: an $18.5 billion bid by CNOOC, the Chinese National Offshore Oil Company (CNOOC) to take over California-based Unocal, America's 9th largest oil producer.

US lawmakers say the unsolicited bid--a whopping $2 billion more than an offer from another American oil company, Chevron--would give China control over a significant slice of the US energy supply.

Last month, the US House of Representatives approved a resolution urging President Bush to block the deal. Congressman Joe Barton, head of the Energy and Commerce committee says that given the military threat posed by China, US export laws "...must ensure that no sensitive technology fall into the hands of the Chinese government."

Senator Charles Schumer called China's trade practices unfair. "Would the Chinese freely allow an American company to take over a Chinese company?" Schumer asked.

Chinese Government officials fired back, accusing US lawmakers of political interference in a normal commercial activity.

Chinese Foreign Ministry spokesman Liu Jianchao expressed hope "that economic interaction and exchange between China and the US can be developed in a healthy way without disturbance."

But a Chinese remark that Congress should change its "mistaken ways" caused angry American lawmakers to block the funds needed for a federal security review of the CNOOC bid.

Daniel Ikenson, a trade policy analyst at the CATO Institute, believes the move could backfire. He says Beijing can play hardball.

"China is in a unique position in the sense that their government makes a lot of buying decisions," he says, "so as a result, when the US does something to throw a wrench into the business process, China can respond by saying, we're not going to buy those Boeing aircraft, we'll buy Airbus, or we're not going to buy US wheat and soy, we'll buy it from Brazil instead. I think they can make the climate much more difficult for US investors in China."

Analysts expect China's buying spree to continue as its economy expands. Last year, China's largest computer company bought IBM's Personal Computer business and last month, a Chinese appliance maker expressed interest in buying its US rival, Maytag.

The bid for UNOCAL is the largest and most ambitious acquisition attempt yet by a Chinese Company. Notwithstanding the controversy, many analysts assert that this purchase, like the others, would have little or no impact on American consumers.

Australia has granted a permanent "protection visa" to a former Chinese diplomat who sought asylum with a claim that China has a vast network, or "army," of spies in Australia.

Chen Yonglin has been in hiding since fleeing the Chinese consulate in Sydney in May. He emerged sporadically to repeat his claims that China has as many as 1,000 spies in Australia. He says the Beijing government's abuse of political opponents forced him to defect.

Chen said he would be punished for speaking out if he was sent back to China.

A spokesman for Australian Immigration Minister Amanda Vanstone said the former diplomat, his wife and six-year-old daughter had been granted permanent protection visas. These are often given to people fleeing persecution in their homeland. Officials in Canberra have yet to fully explain the reasons behind their decision.

Human rights campaigners are delighted that Australia has finally granted Chen permission to stay in the country.

Refugee activist Ian Rintoul said the decision is further evidence that Canberra is softening its hard-line policies.

"The government is under a lot of pressure now with its immigration practices," he said. "They've granted the visa to Chen. We can only hope it's an indication that the other Chinese asylum seekers are going to get similar treatment."

Earlier Friday, China's ambassador to Australia, Fu Ying, warned that if Chen Yonglin was allowed to stay, it would encourage many others to make similar claims of persecution.

Ambassador Fu says Chen was motivated by greed and the desire for a better life.

Another Chinese official - a former secret policeman - is also seeking asylum in Australia. Hao Fengjun has claimed he was a member of China's internal security force working to crackdown on dissidents. He supported Chen Yonglin's allegations that Beijing was engaged in widespread espionage in Australia and is awaiting Canberra's decision on his asylum application.

China has described the allegations by the two defectors as "total slander."

Their cases put Australia in a very difficult diplomatic position at a time when it is negotiating a multi-billion dollar free trade deal with Beijing.

Thursday, July 07, 2005

Many Chinese companies are moving to the private sector as part of the opening of the country's economy. An increasing number are choosing to list on the Hong Kong stock exchange to attract foreign investors. However, results have been mixed and fund managers tell investors to proceed with caution.

The boom in China's economy was clearly demonstrated in June when three Chinese companies launched the biggest initial public offerings of the year on the Hong Kong stock exchange.

Shenhua Energy, Bank of Communications and shipping company China Cosco Holdings together generated $6 billion in share sales - a record for a single month on the exchange.

Another wave of share offerings from Chinese companies is expected later in the year. Hugh Young, managing director for Singapore-based Aberdeen Asset Management, says Hong Kong listings are part of the move by China's state-owned companies into the private sector.

"China is using the capital markets to raise substantial amounts of money for its various businesses, virtually all of which had been in the state sector. So they are raising capital, attracting investors and, in certain cases, major institutions, whether banks such as HSBC, as core investors and the like; all part of the opening up and development of China," he says.

One reason some Chinese companies choose to list in Hong Kong and on foreign exchanges is the poor reputation of the smaller Shanghai and Shenzhen stock exchanges.

Fund managers say many of the companies listed on the mainland Chinese bourses lack skilled management and have little experience in creating shareholder value.

Some, like Hong Kong-based Standard Life Investment fund manager Agnes Deng, see a Hong Kong listing as beneficial for both capital hungry corporations and investors eager to profit from China's economic growth.

"It's kind of a win-win situation," she says. "In terms of the investor, definitely, it really provides more and more for the investor who wants to get exposure to the China growth. It also benefits the Chinese companies which can actually go outside and access the international capital markets."

But investing in China includes some extra risk. Although the government has urged companies to strengthen management and clean up corruption, China's major industries still suffer from considerable instability.

Young says there is often a disparity between investors' visions of business in China and actual results.

"It's a very easy marketing story," he says. "So you can easily imagine board members in US and Europe saying, 'Yes, we need to establish operations in China and, yes, we are willing to spend a few hundred million dollars to get a foothold.' The actually reality of doing business in China is a lot more difficult and making money is not so terribly easy."

China's biggest coal producer, Shenhua Energy, did not perform well on its first day of trading in Hong Kong, falling nearly three percent below its initial price. And Cosco Holdings slipped 10 percent below its initial asking price, due to a weak outlook for global shipping.

Historically, China stocks have not made a great deal of money, and many have fallen off the radar screen since going public. China Mobile and footwear manufacturer Yue Yuen Industrial are among recent top performers.

"The problem with a lot of China stocks, they actually move - the share price moves -in tandem with the [business] cycle. The steel ones go up and down like a yo-yo. So that actually makes the index itself very volatile and the share price very volatile," she says.

Perhaps the best example of the combination of potential and risk for investment in China is its banking industry.

The banks are among China's most vulnerable businesses because they hold vast amounts of bad loans, but they have generated the greatest interest from investors because of their potential for improvement.

Bank of Communications jumped more than 12 percent on its first day of trading, after initially raising almost $2 billion. And financial analysts expect strong debuts later this year from both China Construction Bank, in which Bank of America recently took a nine percent stake, and China Minsheng Banking Corporation.

Howard Gorges, vice chairman of Hong Kong's South China Brokerage, says the Chinese government has been taking aggressive steps to improve the banks' business practices. "The banking system in China has been a basket case and the state's been bailing it out and trying to put more discipline on the banks, and it has allowed foreign banks to become shareholders to bring in modern methods of management and risk control. So they clearly want to make their companies and banks competitive and up-to-date," he says.

Chinese companies are lining up to go public in Hong Kong - about 13 more are expected to list before the end of the year.

But analysts say they should be careful not to flood the market and risk wearing out investor interest, especially as some share prices remain below a dollar.

Also, investors should bear in mind that China's economy, like those of its Asian neighbors, is vulnerable to the high price of oil and other natural resources.

Wednesday, July 06, 2005

Scientists are warning that a recent outbreak of deadly bird flu among migrating birds in western China could spread the virus rapidly beyond its current Southeast Asian stronghold.

The sick and dying waterfowl can be easily spotted at the Lake Qinghai nature reserve. If not paralyzed, they stagger and have tilted necks, classic symptoms of avian flu in such birds.

The outbreak was first detected on April 30 and within three weeks, it killed about 1,500 birds, mostly geese, but also two gull varieties. Now, the World Health Organization estimates that about 6,000 have died.

In a new paper in the journal Nature, Chinese scientists say this is the first evidence that avian flu transmission has spread beyond domesticated poultry into wild bird populations far away from farms. Hong Kong University researcher Yi Guan says the expansion could signal an even further spread of the disease once the flocks begin migrating from the Chinese lake.

"You already know we have a big problem in Southeast Asia. Now this has become a new challenge for us," Yi said.

Yi and colleagues say the infected bar-headed geese at the lake are capable of flying over the Himalayas at a range of 16 hundred kilometers a day.

That migration will not be long in coming. Microbiologist George Gao of the Chinese Academy of Sciences in Beijing says the birds breed at the lake from the end of April only until the end of July.

"So they are flying out, soon. The problem is if there is any carrier, they might carry this to Tibet, India, and Southeast Asia. So that is something we're worried [about]. But whether or not some survivors will carry the virus, we don't know yet," he said.

Gao's team reports in the journal "Science" that they isolated several viruses from the birds and found that each shows the genetic hallmarks of a highly virulent strain. According to the "Nature" article by Yi Guan's group in Hong Kong, it is closely related to the strain that has infected poultry and people in Thailand and Vietnam.

Public health experts fear that it will merge with human influenza in a patient and create a strain that more easily circulates among people and causes a global pandemic that kills millions.

World Health Organization spokesman Dick Thompson says the birds at the Chinese nature reserve should be watched closely.

"There's an urgent need to sample and tag and track as many of these species as feasible, especially considering the narrow time frame that we've got available to do it. We need more information on the migratory routes regarding these birds," he said.

The World Health Organization has urged China to increase its testing of the wild geese and gulls.

Chinese officials--under growing international pressure--say they will eventually revalue their currency, the yuan, but in their own time.

While many government officials and political leaders in the United States and Europe object to the go-slow approach--arguing that China's undervalued currency makes its products unrairly cheap on world markets--there is no shortage of experts who support the Chinese position.

In fact, even some US officials admit privately that a revaluation could boomerang, reducing Chinese exports and monies available for investing in US Treasury securities.

To describe the issue as complex is an obvious understatement.

For the past decade, the yuan, or renminbi, has been pegged at 8.28 to the US dollar. Some economists say it is undervalued by 30 to 40 percent.

Beijing officials say China needs more time to improve its fragile financial system, contending that a rushed revaluation could reduce Chinese exports, which are needed to provide jobs to a growing workforce.

In the world's most populous nation, where the government's legitimacy depends on its ability to continue lifting people out of poverty and into the middle class and in steadily improving the lot of the middle class, the potential for social unrest--on a staggering scale--is clear and always present.

In a recent speech to Asian and European finance ministers, Prime Minister Wen Jiabao said China was committed to what he called a responsive and responsible revaluation. Wen said a change in exchange rates will have a far-reaching impact, and China needs time to prepare. He said a careful, gradual approach would contribute to stable development in China, Asia and the wider world.

Behind the scenes, economists, officials and business people on both sides of the debate are pondering just how China might revalue its currency.

At an international meeting in Hong Kong in June, Norman Sorensen, chairman of the American organization called the Coalition of Service Industries, which is dedicated to reducing barriers to US exports, acknowledged that some past revaluations had caused problems rather than solved them.

"Be careful what one wishes for in terms of pushing too hard for a revaluation process that may not have the fundamentals to secure a controlled revaluation," Sorrensen said.

Masahiro Kawai, economic advisor to the president of the Asian Development Bank, said recent history gives China good reason to move carefully on currency reforms. He points to the Asian financial crisis of the late 1990s, when overvalued Southeast Asian currencies collapsed under pressure from financial speculators - precipitating a severe, prolonged recession in much of the region.

"This Asian financial crisis told us the lesson that a rapid capital account liberalization without adequate preparation would be quite dangerous because capital, a lot of capital, can come into your country in a massive way, and then capital can just leave your country very fast, thus causing a currency crisis. And perhaps that is one reason China is taking a cautious approach," he said.

Robert Lees of BearingPoint, a global business-consulting firm, said his experience in China leads him to the opposite view. He believes the economy is competitive enough to withstand a revaluation.

"I suspect China knows that the time is coming and that it's for the good of China, and that China has a responsibility to the world now. It's done a great job in terms of understanding, accepting that responsibility, especially here in the neighborhood in Asia," Lees said.

According to Lees and Kawai, the trick is whether Beijing can revalue the currency gradually, while protecting it from financial speculators and major fluctuations in the global market.

"I think the views are converging, in the sense that very rapid revaluation, very sharp revaluation, would not be a good idea for China, but rather to revalue the currency on a step-by-step basis, little by little," Kawai said, adding that China's economy could absorb a 20 percent appreciation in the currency over the next four to five years.

Kwai said the changes would take a long time to manage, although small steps could begin immediately.

"It's going to take another 10 years or so," he explained. "So we are not really talking about full flexible, full-fledged exchange rate regime. But this kind of an exchange rate change, which is of a limited nature, can be adopted even from today."

Lees said a controlled revaluation could force the Chinese economy to become more stable and efficient. But he noted the process faces a major hurdle - a fragile banking system.

"China's banking system has been its real Achilles' heel over the last several years, primarily due to loans, huge loans, that were made without proper credit risk management procedures and transparency in effect," he said.

Tuesday, July 05, 2005

United Nations health officials say bird flu is entrenched in China and other Asian countries and will take up to a decade to eradicate. The warning comes as three UN agencies announce a global plan to stop the spread of the virus and appeal for funds to implement the proposal.

The UN plan was unveiled on Tuesday, the second day of a three-day international bird flu summit in the Malaysian capital of Kuala Lumpur.

The summit was organized as concerns mount that the virus may mutate to a form easily transmitted between humans, and cause a global flu pandemic.

UN officials say Asian countries will need over $100 million from international donors as soon as possible to help bring the bird flu virus under control.

The UN's Food and Agricultural Organization (FAO), which jointly issued the plan with the World Health Organization and the World Organization for Animal Health, says the funds are needed to vaccinate poultry, launch better surveillance systems, and train veterinary experts over the next three years.

Joseph Domenech, chief veterinary officer for the FAO, who is attending the Kuala Lumpur summit, says no country is immune to the risk of bird flu. "The word global means also global geographically," he says. "It's an international crisis because no poultry producing country can pretend it's without any risk of introduction, this can happen any time and anywhere."

The global plan is now being distributed to international donors and UN officials say they expect half of the money asked for to be committed by the end of the year.

Since late 2003, dozens of people have died from the bird flu virus in Vietnam, Thailand, and Cambodia after coming into contact with infected birds.

Monday, July 04, 2005

Health and animal experts Monday called for the mass vaccination of poultry in Asia to stop the spread of the virulent H5N1 bird flu virus, which has claimed dozens of human lives in the region.

The call came at the opening of a three-day UN conference in the Malaysian capital, Kuala Lumpur.

The UN World Health Organization says prevention needs to focus on small-scale farming- where there is a close mingling of humans, pigs, chickens, and ducks in backyard farms.

Peter Cordingley, the WHO's spokesman for the Western Pacific, says changes are also needed in traditional wet markets. "There are wild animals and they're slaughtered on the spot and there's guts and stuff on the floor. In the past I think that's been culturally acceptable, but in these days of emerging disease quite clearly it's not appropriate anymore so we're looking to have actions on that front as well," he said.

Health experts say these practices boost the risk the bird flu virus and the human flu virus could mix and mutate into a form more easily transmitted to humans.

They agree the virus is unpredictable. For example, in areas of Southeast Asia there are ducks infected with the virus that show no symptoms, but excrete the virus, possibly infecting chickens.

At the same time, in China's remote Qinghai Province, 6,000 migratory birds - which are supposed to carry the virus but show no symptoms - suddenly dropped dead last month.

Cordingley said this is confusing. "So what's going on? Do we have different viruses? One in China and one in Southeast Asia? This virus is puzzling us," he said.

The World Health Organization has conducted studies in Vietnam, where the majority of human cases have sprung up. Cordingley says, luckily, the evidence suggests there is time to stem a human epidemic. "Basically it's still a big and growing problem, but indications that we'd had that it was getting a lot worse very quickly - that wasn't the case. Basically we're exactly at the same place as we were before…the threat has grown by the month this year, we still think it's a very serious threat to global health," he said.

UN health experts at the summit are calling on regional governments now to devote more money and resources to combat the spread of the virus.

Saturday, July 02, 2005

A priest from China's underground Catholic church has been released after nearly six years under house arrest.

Published reports from the Vatican say Vincent Kong Guocun was freed last month because of poor health. There is no official confirmation from Beijing.

The 34-year-old priest, who was from an unapproved diocese in Wenzhou along China's southeastern coast, had been under house arrest since October 1999.

China broke off formal relations with the Vatican in 1951, and Chinese Catholics are only allowed to worship in a state-sanctioned church. Many Chinese Catholics have risked arrest by worshipping in unofficial churches and private homes.

Beijing and Rome have been getting closer to resolving their differences since the election of Pope Benedict the XVI in April.

Friday, July 01, 2005

Protesters rallied in the streets of Hong Kong at an annual march for democratic reforms. Reports indicate several thousand people took part; but the turnout was significantly lower than in previous years.

Friday's protest was timed to coincide with the eighth anniversary of Hong Kong's return to Chinese rule in 1997.

In previous years, as many as 500,000 people took part in protesting the former British colony's weak economy and the political controls imposed on Hong Kong by the Chinese government.

Organizers of the rally say the low turnout does not mean that democratic reforms have become less important to Hong Kong's nearly seven million residents. However, the territory's popular new chief executive, Donald Tsang, says Hong Kong's ties with Beijing are now closer than ever before.

Tsang was chosen by Communist Party leaders in Beijing to succeed Tung Chee-hwa, who resigned in March.